Thursday, October 27, 2016

Oil Prices Are Too Gloomy On Chance Of OPEC Deal

Oil producers can start fixing their credibility problem without too much effort. Crude prices have wilted after Iraq joined Nigeria, Iran and Libya in asking for exemptions from proposed production cuts. But Baghdad’s demands need not be the death knell of a deal to reduce output. Even a small reduction in production would balance a market that is now only narrowly oversupplied.

The global oil market is oversupplied by around 800,000 barrels per day (bpd) heading into the winter, when demand in the major northern hemisphere consuming market usually increases, according to figures from the 14-member Organization of the Petroleum Exporting Countries (OPEC). Other, independent, estimates show the gap between supply and demand may have shrunk to 500,000 bpd, equivalent to about 1.5 percent of OPEC’s total official output in September.

Saudi Arabia and its neighboring Gulf Arab states – which together account for over half of the cartel’s production – normally produce more crude in the summer to meet higher domestic demand for air conditioning. They could feasibly shoulder the majority of the cartel’s proposed cuts without suffering a significant drop in government revenues or losing market share overseas.

After all, Iraq and Iran probably won’t be able to increase output significantly in 2017, while output from Nigeria and Libya will remain unreliable at best. OPEC figures show that Baghdad has raised output by about 36 percent since 2014, but that performance will be hard to replicate unless it can significantly expand capacity at its main export port on the Al-Faw Peninsula. And any exemptions from production cuts handed out when OPEC next meets, on Nov. 30, would in any case be reviewed within six months.

Iraq’s demand therefore hardly warrants an intraday decline of 1 percent that has pushed the price of a barrel of Brent crude close to $50 on Oct. 26. The bigger barrier to a deal is the fractious politics being played out in Syria and northern Iraq.